ACCA Financial Management (F9) Certification Practice Exam

What term describes the conversion of illiquid assets into marketable securities?

1. Hedging

2. Securitisation

3. Leveraging

4. Speculation

The correct answer is: Securitisation

The term that describes the conversion of illiquid assets into marketable securities is securitisation. This financial process involves pooling various types of debt—such as mortgages, student loans, or credit card debt—and creating new securities backed by these assets. These securities are then sold to investors, thereby transforming illiquid assets, which are not easily sold or exchanged for cash, into liquid financial instruments that can be traded in the capital markets. Securitisation allows businesses to raise capital by turning their illiquid assets into cash and provides investors with opportunities to invest in a diversified pool of assets. It is a key mechanism in financial markets that enhances liquidity and promotes more efficient allocation of capital. This concept is distinct from the other choices provided. Hedging refers to strategies aimed at reducing risk exposure in investments, leveraging involves using borrowed funds to increase potential returns, and speculation is centered on taking risks in the hopes of achieving substantial returns. Each of these terms relates to different aspects of financial management but does not pertain to the process of converting illiquid assets into marketable securities.